What is Banking?
What is banking is a simple question. To define the term banking, you must say it is an industry that deals with credit, cash, and numerous other transactions. A bank provides a secure place where you can store some additional credit and cash. Banks also propose Certificates of Deposit. Savings accounts and checking accounts. A bank uses various deposits for making loans, and they comprise business loans, car loans, and home mortgages. Hence, banking is called the business activity to safeguard and accept money that other entities and people own before this money is lent out for earning a profit.
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Explain Banking Activities
With passing time, banking activities have become widespread, and today, banks propose different other services. These days, banking services comprise the issuance of credit and debit cards. Again, banks also propose custody of people’s valuable items. You can also get lockers, online transfers of funds, and ATM services from banks. The most important thing is every person is required to have basic banking knowledge.
What is the Structure of a Banking System?
The banking system comprises some organizational features like:
Unit banking
Branch banking
Group banking or holding company
Chain banking
Banking systems are also formed on some functions or techniques:
Mixed banking
Deposit banking
Merchant banking
Investment banking
Group banking and chain banking are related to Unit Banking. The modern banking concepts have gone through a huge historical process based on geographical, political, and socio-economic factors, as historical experiences do vary from one nation to another.
Importance of Bank
The importance of bank can’t be denied at any point. Though banks do several things, their chief job is taking funds that are known as deposits. Banks lend them to people who require funds. The notable thing is banks work as intermediaries between depositors who lend cash to the banks and borrowers to whom the banks lend money. An amount the bank pays for the income, and the deposits it receives are known as interest.
A depositor can be households, people, non-financial and financial firms, local governments, and national governments. Again, borrowers too can have these identities. A deposit is made obtainable on-demand, like a checking account or with a few restrictions, like time deposits and savings.
The most important role that a bank plays is matching up borrowers and creditors. A bank becomes important to the international as well as a domestic payment system, and it forms money. Contrary to popular belief, only individuals do not need money as governments and businesses are required to borrow and deposit money. In this aspect, a bank plays a pivotal role. Banks process payments, and they range from little personal checks to high-value electronic payments.
The payment systems of banks are considered complex arrangements of national, local, and international banks. Most often, it includes private clearing facilities and government central banks that match up the things between banks.
What is a Banking Project?
Every person needs money for some commercial or personal purposes. A bank happens to be the oldest lending institution as it proposes countless facilities to every citizen. To survive in this highly competitive market, every bank does implement innovative strategies, ideas, and progressive technologies. And so, for this purpose, banks give all the details about their projects and institutions to people.
Banks propose ample facilities for contending their customers. They provide mobile banking, net banking, instant facility door-to-door facility, Demat facility, investment facility, loans, advances, credit card facility, account facility, and lots more.
What is Known as a Core Banking System?
A core banking system is recognized as the back-end system which processes regular banking transactions. Additionally, it posts updates to different financial records and accounts. The core banking systems commonly comprise loan processing capacities, credit processing capacities, and deposits with an interface to reporting tools and general ledger systems.
What are the Types of Deposits?
Time Deposit - A time deposit has got a fixed time of maturity. Some examples are recurring deposits, fixed deposits, staff security certificates, and cash certificates.
Demand Deposit - This deposit is made by the bank when the account holder demands it. Some instances are current account, savings in a bank account, and demand draft.
Conclusion
In Conclusion, banking holds a crucial role in our day-to-day life. We must adhere to the banking system as responsible citizens. The banking system acts as a crucial base for the financial system as well as the entire economic system of the country. It provides a base to the market and the companies. In a crux, we can say that it is the source of channeling the finance by the people of the country.
FAQs on Banking Basics: Functions and Types
1. What is a bank and what is its main purpose in the economy?
A bank is a financial institution licensed to receive deposits and make loans. Its main purpose is to act as an intermediary, taking funds from people who have extra money (savers) and lending it to those who need it (borrowers). This circulation of money helps support economic activity and growth.
2. What are the two primary functions of any commercial bank?
The two primary functions of a commercial bank are fundamental to its operation:
- Accepting Deposits: This involves safely holding money for the public in various accounts, like savings accounts, current accounts, and fixed deposits.
- Granting Loans and Advances: This is the process of lending the deposited money to individuals and businesses, which is the main way banks earn income through interest.
3. What are the main types of bank accounts available to individuals?
The most common bank accounts for individuals are:
- Savings Account: Designed for saving money. It offers a modest interest rate and may have limits on the number of withdrawals.
- Current Account: Best for businesses or individuals with frequent transactions, as it allows for numerous deposits and withdrawals without restriction but usually pays no interest.
- Fixed Deposit (FD) Account: Money is deposited for a fixed period at an agreed rate of interest, which is typically higher than a savings account.
- Recurring Deposit (RD) Account: A fixed amount is deposited every month for a specific period, helping to build savings through regular contributions.
4. What is the real-world difference between a commercial bank and a central bank?
The key difference is who they serve. A commercial bank (like SBI or HDFC) deals directly with the general public and businesses, offering services like accounts, loans, and credit cards. A central bank (like the Reserve Bank of India) does not deal with the public. Instead, it acts as the government's bank and supervises all other commercial banks to ensure the financial system is stable.
5. How does a bank actually 'create' money in the economy?
Banks create money through a process called credit creation or fractional reserve banking. When a bank receives a deposit, it is legally required to keep only a small fraction of it as cash (the reserve). It lends out the remaining amount. This loan becomes a new deposit in another account, and the process repeats. This cycle multiplies the initial deposit, effectively creating new credit and increasing the money supply in the economy.
6. Why is accepting deposits considered a bank's most important function?
Accepting deposits is the most crucial function because it is the foundation for everything else a bank does. Without a pool of funds from depositors, a bank would have no money to lend. These deposits provide the raw material for granting loans, which is how banks earn their primary income and fuel economic activities like business expansion and home purchases.
7. Can you give an example of a bank's secondary or agency function?
A simple example of a secondary function is providing safe deposit lockers. In this role, the bank acts as an agent for its customer by offering a secure space to store valuables like documents and jewellery for a fee. This service is not part of its core deposit-taking or lending activities but adds value for the customer.
